Bipartisan Bill Would Ease Restrictions on Construction Lending

The Trump Administration’s initial tax plan may be short on details, but a bipartisan bill introduced Wednesday offers some very specific relief for the commercial real estate industry.

The bill, sponsored by Congressman Robert Pittenger (R-NC) and Congressman David Scott (D-GA), would clarify rules that critics say have caused banks to pull back from construction lending, hurting credit availability and driving loans into risky, unregulated sectors.

Under Basel III requirements that went into effect in January 2015, regulators introduced a 150% risk weighting for a new category of acquisition, development and construction loans called High Volatility Commercial Real Estate. Previously, regulators used to put all construction loans in the 100% risk based capital bucket.

The new capital rules are designed to force borrowers to have more skin in the game. In order to avoid the HVCRE designation, they must meet a 15% equity requirement. The leverage on the loan also cannot exceed 80% of the estimated completed value of the project.

The problem, according to lenders, is that these rules don't recognize the way construction lending works. For example, developers often purchase parcels of land and sit on them for several years; yet the requirements do not recognize the appreciated value of the land in determining how much equity the developer has to bring to the table.

Since the higher capital requirement is reflected in the price of loans, it puts banks at a competitive disadvantage to nonbank lenders.

“Despite attempts by federal banking regulators to clarify the rule, lenders still have concerns that the criteria are overly inclusive and unclear, resulting in a broad swath of loans defined as HVCRE loans; thus, the rule serves as a disincentive to even prudent loan-making in some circumstances,” the bill’s authors said in a press release.

The proposed legislation would address this by better defining HVCRE loans. It would also count the appraised value of any real property toward the 15% contributed capital requirement, and allow internally-generated funds to be withdrawn from the project.

The bill also defines the conversion from HVCRE status to permanent loan status prior to the end of the loan. Currently, the Basel III requirements restrict reclassifying a high volatility construction loan to a permanent CRE credit. And loans considered as high volatility must be held for the full term. The Mortgage Bankers Association, for one, has been urging the regulators to allow reclassification earlier, once the loan meets the bank's internal underwriting standards.

And loans made prior to January 2015 would be exempted from the rule.

The bill, H.R. 2148, is supported by more than a dozen trade associations, including the MBA, the Independent Community Bankers Association, National Apartment Association, National Association of Home Builders, National Association of Realtors, and the Commercial Real Estate Finance Council.

The CRE Finance Council, which represents lenders, investors, asset managers and commercial mortgage-backed securities issuers, welcomed the legislation, calling it “an important step forward in addressing concerns with the rule.”

“Our membership looks forward to working with both Congress and the regulators to create solutions that provide clarity to lenders and borrowers while also maintaining critical prudent capital standards," stated executive director Lisa Pendergast.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.